Morningstar DBRS Downgrades Credit Ratings on Eight Classes of Wells Fargo Commercial Mortgage Trust 2017-RB1 and Confirms Remaining Credit Ratings, Negative Trends

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on eight classes of Commercial Mortgage Pass-Through Certificates, Series 2017-RB1 issued by Wells Fargo Commercial Mortgage Trust 2017-RB1 as follows:

-- Class B to A (high) (sf) from AA (low) (sf)
-- Class X-B to BBB (high) (sf) from A (sf)
-- Class C to BBB (sf) from A (low) (sf)
-- Class X-D to BB (high) (sf) from BBB (sf)
-- Class D to BB (sf) from BBB (low) (sf)
-- Class E-1 to B (low) (sf) from B (high) (sf)
-- Class E-2 to CCC (sf) from B (sf)
-- Class E to CCC (sf) from B (sf)

Morningstar DBRS also confirmed its credit ratings on the remaining classes as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class EF at CCC (sf)
-- Class F at CCC (sf)
-- Class F-1 at CCC (sf)
-- Class F-2 at CCC (sf)
-- Class EFG at C (sf)
-- Class G at C (sf)
-- Class G-1 at C (sf)
-- Class G-2 at C (sf)

Morningstar DBRS maintained the Negative trends on Classes B, C, D, E-1, X-B, and X-D. The trends on all other classes are Stable with the exception of Classes E-2, F-1, F-2, G-1, G-2, E, EF, EFG, F, and G, which have credit ratings that do not carry trends in commercial mortgage-backed securities (CMBS) transactions.

The credit rating downgrades reflect an increase in Morningstar DBRS' loss projections, attributable to the specially serviced 340 Bryant loan (Prospectus ID#17, 2.6% of the pool), coupled with the credit deterioration and recent transfer of the 1166 Avenue of the Americas loan (Prospectus ID#8, 5.3% of the pool) as well as ongoing concerns regarding the delinquent Anaheim Marriott Suites loan (Prospectus ID#10, 4.3% of the pool) loan. Morningstar DBRS' loss projection from the liquidation of the 340 Bryant loan is contained to the unrated Class H certificate; however, the capital structure provides limited credit support to the junior bonds in the event of additional losses, given the thin tranching for the junior bonds. In the event that the Anaheim Marriott Suites loan resolves with a liquidation or there is an additional value decline for the 340 Bryant loan, the principal balance of the Class E certificates would be reduced to zero and would erode the credit support to the Class D certificates, supporting the credit rating downgrades.

The Negative trends on Classes B, C, D, E-1, X-B, and X-D reflect the ongoing concerns above as well as the significant concentration of loans backed by office properties. Morningstar DBRS identified a number of loans that continue to exhibit declining credit metrics with little to no performance improvement since the last review. Although a number of loans continue to struggle, there is still runway prior to the 2027 maturity dates for the majority of loans in the pool, providing some time for property stabilization to occur. In the event that loans continue to deteriorate ahead of 2027; Morningstar DBRS could take further credit rating downgrades on the classes that currently carry Negative trends.

As of the September 2024 remittance, the pool had experienced a 15.5% collateral reduction since issuance, with 33 of the original 37 loans remaining in the pool with an aggregate principal balance of $538.7 million. Four loans are fully defeased, representing 4.1% of the pool balance. Two loans, representing 8.0% of the pool, are in special servicing and six loans, representing 21.4% of the pool, are on the servicer's watchlist primarily for performance-related concerns. Fifteen loans, representing 53.5% of the pool, are secured by office properties. Where applicable, Morningstar DBRS increased its probability of default (POD) penalties and, in certain cases, applied stressed loan-to-value ratios (LTV) for office loans exhibiting performance concerns.

The largest loan in special servicing, 1166 Avenue of the Americas, is secured by the first five floors of a Class A office property in Midtown Manhattan. The loan recently transferred to the special servicer in July 2024 with a pre-negotiation letter sent to the borrower. The loan was previously added to the servicer's watchlist in July 2023 because the largest tenant, The D.E. Shaw Group (D.E. Shaw; 43.6% of the net rentable area (NRA)), confirmed that it will vacate its space upon lease expiration in September 2024. Bloomberg reports that the tenant is moving its headquarters to Two Manhattan West in 2024. The second-largest tenant, Arcesium LLC (Arcesium; 20.0% of the NRA), has a lease guaranteed by D.E. Shaw and had a lease expiration in June 2024. The master servicer previously noted that Arcesium is looking for space elsewhere; however, a final decision is pending. Although it appears that Arcesium remains active at the property, the tenant is likely operating on a month-to-month lease. As of the August 2024, rent roll, the subject remains 100% leased but occupancy could drop to 36% with the departure of these two tenants, which appears likely given the recent transfer to special servicing.

According to the YE2023 financial reporting, the property generated $10.8 million of net cash flow, higher than the prior year and issuance figures of $9.8 million and $8.2 million, respectively. The loan is also structured with a cash sweep that was triggered when D.E. Shaw and Arcesium failed to provide notice of renewal 18 months prior to their initial June 2024 lease expiration dates. The cash sweep is structured to trap all excess cash until an amount equal to $75.00 per square foot is collected. According to the September 2024 reporting from the lead securitization in Morningstar DBRS-rated BBCMS Mortgage Trust 2017-C1 transaction, reserve balances totalled $10.4 million, including $4.2 million in its tenant reserve account and $6.2 million in a letter of credit. While the upcoming rollover is noteworthy, the loan benefits from structural mitigants, namely the low going-in LTV ratio of 48.9% based on the whole-loan balance of $110.0 million and the issuance appraised value of $225.0 million as well as the cash sweep provisions. Moreover, the loan's maturity date in 2027 will provide the sponsor time to backfill vacant space and work toward stabilization once tenants begin rolling in 2024. Furthermore, the property benefits from its excellent location in Manhattan and a strong loan sponsor, Edward J. Minskoff Equities, Inc. Morningstar DBRS analyzed the loan with an increased POD penalty and stressed LTV, resulting in an expected loss of approximately double the pool average.

The 340 Bryant loan is secured by a 62,270-sf, Class B office property in downtown San Francisco. In December 2021, the property's largest former tenant, WeWork (77.0% of NRA), terminated its leases ahead of their respective scheduled expirations in 2028 and 2029. While the tenant paid a termination fee of approximately $5.0 million, the borrower has been unable to backfill the space since the tenant's departure. An updated rent roll was not available; however, it appears that the entire building is now vacant following the departure of the last remaining tenant, Logitech (23.0% of the NRA), which had a scheduled lease expiration in April 2024. The loan has been in special servicing since September 2022 with foreclosure occurring in October 2023. As of the September 2024 reporting, the loan was real estate owned with disposition of the property expected to take place at YE2024. The property's value was reappraised in April 2024 at $8.2 million, representing an 84% decline from the issuance value of $52.0 million. In its analysis for this review, Morningstar DBRS liquidated the loan from the trust using a haircut to the most recent appraisal, resulting in an implied loss exceeding $12.5 million or a loss severity approaching 90%.

Another loan of concern, Anaheim Marriott Suites, is secured by a 371-room, full-service hotel located in Disneyland, California. In Morningstar DBRS' previous review in October 2023, the loan was in special servicing; however, the borrower had signed a reinstatement agreement in July 2023 and the loan was brought current. The loan is on the servicer's watchlist, once again for delinquent payments as the borrower last paid debt service in July 2024. The loan is also flagged for performance concerns, namely a low debt service coverage ratio (DSCR). According to the most recent financials for the trailing 12-month period ended March 31, 2024, the loan reported a DSCR of 0.39 times (x), down from 0.87x at YE2023. According to the April 2024 STR, Inc. report, occupancy, average daily rate, and revenue per available room (RevPAR) at the subject property were underperforming the competitive set with a RevPAR penetration of 81%. The subject's value was reappraised in June 2023 at $64.5 million, reflecting a 22.3% decline compared with the issuance value of $83.0 million. Morningstar DBRS believes that this loan will likely transfer back to the special servicer in the near term if payments are not made current. In light of these issues, Morningstar DBRS applied a stressed LTV assumption based on the updated value and an additional POD adjustment, resulting in an expected loss of approximately double the pool average.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Classes X-A, X-B, and X-D are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit ratings assigned to Classes AS and B materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk. The analysis for this review included stressed scenarios for several office loans, given the general challenges facing the sector. The results of the analysis suggested downward pressure for the more senior bonds in the stack following the credit rating downgrades, which are most pronounced for Classes AS and B. However, given that the most challenged loans would likely be transferred to special servicing and possibly liquidated closer to maturity in 2027, Morningstar DBRS believes that the increased risks are mostly concentrated in the lowest-rated classes, supporting the credit rating downgrades and trend change taken with this review.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology and North American CMBS Insight Model v 1.2.0.0 (March 1, 2024), https://dbrs.morningstar.com/research/428797
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.